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November 4, 2002

Chambers v. Kay 02 C.D.O.S 10913

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The Supreme Court holds that fee division arrangements between counsel that do not comport with the ethical requirement of written client consent cannot be enforced.

Philip Kay had an office sharing arrangement with Arthur Chambers, utilizing a conference room and other services.  When Kay began representing Rena Weeks in a sexual harassment lawsuit against a prominent law firm, he solicited Chambers’ assistance.  Chambers became co-counsel on the case, advanced costs, and conducted discovery.  Kay terminated the co-counsel arrangement after a dispute arose over discovery issues and settlement advice.  Kay sent a letter setting forth a specific division of the fee in the event of a recovery and Chambers accepted the division.  Weeks received a copy of Kay’s letter, but at no time consented in writing to the fee division.

After obtaining a large recovery and fee, Kay repudiated his prior agreement.  Chambers’ suit for breach of contract and one common count was decided in Kay’s favor on a motion for summary judgment.  Because Chambers had failed to obtain Weeks’ written consent to the fee division pursuant to California Rule of Professional Conduct 2-200, he was not entitled to Kay’s proposed fee division.  The trial court also ruled that recovery on a quantum meruit theory was barred by the statute of limitations.  The Court of Appeal affirmed the ruling on the Rule 2-220 violation, but held that the statute of limitations did not bar recovery on a quantum meruit basis. (PL Update No. 107) The Supreme Court agreed with the reasoning of the Court of Appeal.

Chambers argued that Rule 2-200 applies only to pure referral fee arrangements, and not to arrangements where an attorney performs services in exchange for a share in the fees.  The Court examining the language and the history of the rule and determined that the rule applied equally to all fee divisions.

The Court refused to find that Chambers fit within the Rule’s exemption for partners or associates.  Chambers and Kay were not partners in the conventional sense.  Rather, Chambers and Kay entered into what can be characterized as a joint venture for the purposes of the Weeks case.  Although a joint venture has many of the same characteristics of a partnership, the latter presumes a continuing business relationship and the former is on a per project basis.  To hold the rule’s exemption applied to a joint venture between attorneys on a single case creates an exception that would swallow the rule.

The Court also rejected the theory that Chambers’ role in the case was as Kay’s “associate.”  Rule 1-100(B)(4) defines an associate as an attorney who is an employee.  Chambers did not receive compensation from Kay as a salaried employee and in fact Chambers advanced costs on the case.  Thus, Kay’s supervision of Chambers’ work on the case did not transmute the fee division to an employer-employee relationship.  The court distinguished each case relied on by Chambers where an employee or associate relationship was found justifying application of the exemption in Rule 2-200.

The Court disapproved of the reasoning in Sims v. Charness (2001) 86 Cal.App.4th 884. (PL Update No. 107)  Sims purported to rely on a State Bar Formal Opinion that found that Rule 2-200 was designed to protect clients from attorneys “brokering” cases to other counsel.  The Court found that although brokering is a primary concern of Rule 2-200, the Rule is not limited to those situations.

The Court found that compliance with Rule 2-200 ensures that the client is not charged unwarranted fees.  The writing requirement relieves the client of mentally retaining the fee division information during the pendency of the case and impresses upon the client the importance of her consent.  The Court also noted that strict compliance with Rule 2-200 also serves the purpose of keeping the client reasonably informed about significant developments pursuant to Rule 3-500.  To allow a fee division in spite of non-compliance with Rule 2-200 would be countenancing and contributing to a violation of a Rule that serves an important public policy function.

The Court was not persuaded that Rule 1-100(A), which precludes the Rules from creating new civil causes of action, prevented Kay from raising non-compliance with Rule 2-200 as an affirmative defense.  Kay’s defense did not assert a civil cause of action against Chambers and compliance with Rule 2-200 did not create a substantive legal duty subjecting Chambers to liability for its breach.

Finally the Court warned that recovery under quantum meruit could not be predicated upon an apportionment of the contingent fee.  Such an exercise of a trial court’s discretion may be proper in a situation where an attorney has not violated an ethical rule and is discharged from a case prior to its conclusion.  To countenance this approach in a situation where there has been an ethical violation is to allow the attorney to indirectly enforce an invalid fee sharing arrangement.

Comment: Attorneys entering into fee sharing arrangements with co-counsel must understand that failure to obtain the client’s written consent is not a mere technical violation, but affects the attorney’s substantive right to a fee.

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